All is well at DLJ…

To describe the period between October 2004 and March 2005 as a difficult time for DLJ Merchant Banking Partners, the in-house LBO platform of the investment banking arm of Credit Suisse, would be an understatement. Caught up in a power struggle between some of its senior dealmakers, rival private equity firms and top brass Credit Suisse management, the division at one stage seemed on the brink of termination, and an exodus of leading investment professionals followed.

It was the defining characteristic of DLJ's business model, i.e. its so-called ?independent affiliate? status within the bank, which helped trigger the crisis in the first place. As an in-house entity, the group has the gamut of CS's vast investment banking capabilities at its disposal; crucially, however, it also enjoys full control over its own investment process, without interference from anyone else at the bank.

Ever since the group's formation in 1985, this formula has worked exceptionally well. Not only has it consistently delivered top-level returns on equity to its banking parent; DLJ Merchant Banking Partners also became a favorite among third-party investors, as evidenced by the $5.3 billion DLJ Merchant Banking Partners III fund raised in 2000, at the time one of the largest LBO pools ever organized.

The group continued to prosper in recent years, a time when many captive buyout teams at other investment banks spun off as part of a fast-spreading industry trend.

But things took a dramatic turn for the worse in the autumn of 2004 when DLJ, along with JP Morgan Partners, beat rival buyout heavyweights including KKR and Black-stone in the now notorious battle for Northern Irish pharmaceutical company Warner Chilcott. As highly fee-generative clients of CS's investment banking business, DLJ's rivals didn't take the defeat well at all. Some of them vowed never to do business with the bank again unless DLJ be ordered not to compete in large-scale LBOs – a demand seen by some as effectively a threat to the latter's standing as an independent fiduciary.

For months it was unclear how the bank would respond, and in March 2005 it was announced that DLJ star investor Tom Dean and a team of likeminded colleagues would leave the firm in order to launch their own buyout business, Avista Capital. An ongoing effort to raise DLJ Merchant Banking Partners IV was abandoned. Soon afterwards, Credit Suisse announced that DLJ would continue to raise and invest private equity funds, albeit ones focused on mid-market buyouts, minority positions in larger transactions and growth capital deals – in other words, funds that would not get in the way of the likes of Henry Kravis and Steve Schwarzman.

DLJ Merchant Banking Partners